France

FX Concepts' John Taylor is out with today's slam dunk de-noisification of all that is irrelevant with the following summary of what is really going on as the world's central banks embark on the latest and hopefully final attempt to reliquify everything. All we can add to Taylor's analysis, especially in light of today's incremental easing in ECB collateral requirements, is that the biggest beneficiary by far of what in a few months will be another multi-trillion balance sheet expansion, is and continues to be hard, non-dilutable, i.e., real, money. Because as fiat currency loses all relevance in a world in which it is printed on a daily basis by the central banks, whether or not we end up with a Weimar scenario, the cash thrown out by the even profitable companies will be increasingly more meaningless. Yet the take home message is that banks will never, ever stop diluting existing money. They simply can't as the past few months have so vividly demonstrated.

Here comes the (re)crash and the search for shortable stock is on! The good thing about bankruptcy is that despite silly manilly market, bankrupt is bankrupt and the stock will act accordingly. Ask GGP/LEH investors.

While a lot of the just completed Draghi press conference was mostly fluff, the one notable exception was the announcement that the European central bank would "approve eligibility criteria for additional credit claims" (see below). While purposefully vague on the topic, Draghi noted that the step is one of onboarding even more risk: "Sure, it's going to be more risky. Does that mean that we take more risk? Yes, it means we take more risk. Does it mean this risk is being unmanaged? No, it is being managed. And it's being - it's going to be managed very well because really there will be a strong overcollateralization for the additional credit claims. The conditions will be very stringent." While it remains to be seen just how stringent the conditions will be, but a bigger question is what is the total pool of eligible claims that can be used to flood the ECB in exchange for freshly printed cash. For that we go to Goldman whose Jernej Omahen a month ago calculated the impact of the expanded collateral pool which was formally confirmed today. To wit: "Scarcity of collateral was becoming an evident problem for a large number of banks, especially smaller and medium sized. In our view, the ECB’s collateral pool expansion was therefore a critical decision. Select corporate loans – which form over >€7 tn, or >30% of total balance sheets – will now be admissible for refinancing operations, through national central banks. Criteria on eligibility have yet to be determined – we are therefore not able to quantify the actual expansion of collateral pool at this stage. That said, the €7 tn starting points suggests it will be significant." In other words, and this is excluding anything to do with the LTRO, the ECB just greenlighted a potential expansion to its balance sheet all the way up to €7 trillion. Will banks use this capacity to convert "trash to cash" - why of course they will, and this goes to the very heart of the biggest problem with Europe: the fact that there are virtually no money good assets left as collateral, which requires the implicit rehypothecation of bank "assets" back to the ECB, to procure cash, to pay out cash on liabilities. How much will they do - we don't know yet. We will find out very soon. What we do know is that the ECB's €2.7 trillion balance sheet is about to expand dramatically, pushing the European central bank even further into bad bank status. And this is excluding the upcoming new usage of the Discount Window known as the LTRO in three weeks. Trade accordingly.

Will A be the new AA+? Perhaps, if the S&P follows through with its latest threat. Bloomberg reports that, "the U.S., lacking a plan to contain $1 trillion deficits, faces the prospect of another rating cut in six to 24 months depending on the outcome of November elections, according to John Chambers of Standard & Poor’s. America has had an AA+ rating with a negative outlook since Aug. 5 when the New York-based unit of McGraw-Hill Cos. stripped the nation of its AAA ranking for the first time, citing the government’s failure to agree on a path to reduce deficits. The U.S. has a one-in-three chance of another downgrade, Chamber said today during an S&P sponsored Webcast. “What the U.S. needs is not so much a short-term fiscal tightening, but it has to have a credible medium-term fiscal plan,” said Chambers, managing director of sovereign ratings." Too bad the US doesn't even have a fiscal plan what it will do tomorrow, let alone in the "medium-term" courtesy of the most deadlocked political system ever. As for "credible" - forget it. And as was shown, if the first US downgrade from August 5, 2011 broke the US stock market, we can't wait to find out how the Citadel-controlled, FRBNY-blessed stock market will deal with this particular event. In other news, we are still waiting to hear from Moody's on both the US and France.

• Greek Premier to Seek Bailout Consensus Amid Political Quarrels (Bloomberg)
• Merkel makes case for painful reform (FT)
• Bernanke Cites Risks to Progress of Recovery (WSJ)
• Proposed settlement with banks over foreclosure practices dealt a setback (WaPo)
• Merkel Approval in Germany Climbs to Highest Level Since 2009 Re-Election (Bloomberg)
• Francois Hollande will spark next euro crisis (MarketWatch)
• China’s Central Bank Pledges Support for Housing Market (Bloomberg)
• Italy Pushes for Europe Growth Policy (Bloomberg)
• Santorum bounces back in Republican race (FT)
• China 'Big Four' Banks Issued CNY320 Billion New Yuan Loans In Jan (WSJ)
• Gasoline and diesel prices raised (China Daily)

Just a week ago we brought readers' attention to the fact that Francois Hollande, the Socialist Party candidate who is leading most opinion polls in the French presidential election, was extending his lead; well the lead is growing, to now 58-42 in the second round. In a must-read discussion this evening, George Magnus of UBS points to the significance of the French elections and how Hollande's victory could unleash 'a new wave of instability and uncertainty, and that the relative calm or optimism in financials markets since the turn of the year would prove short-lived'. Specifically Magnus highlights how the politics of Europe could well trump the liquidity of the ECB as the main determinant of the Euro Area's prospects. While not playing down the role of the initial (and forthcoming second) LTRO, the UBS senior economic adviser has grave concerns of the much bigger and less tangible issues of sovereignty and national self-determination that will not only impact Greece (very shortly) but also Germany, France, and the Euro-zone itself. The French election could be a catalyst for Franco-German (Merkande? Hollel?) divisions which 'would not sit comfortably inside the ECB or in the minds and actions of investors' and is evidently an unpriced and under-appreciated risk in global markets currently.

Weekend talks between Greek government officials failed to reach a definitive conclusion and as such market sentiment has been risk averse across the asset classes. The equity market has been chiefly weighed upon by the banking sector and as such underpinned the rise in fixed income futures. However, recent trade has seen a slight pullback led by tightening of the French spreads on reports of good domestic buying noted in the belly of the French curve. Today marks the deadline for Greece to provide feedback as to the proposed bailout terms put forth by the Troika, but with continued disagreement on the fine print in the additional austerity proposals, market participants remain disappointed in the lack of progress. Of note a PASOK spokesman has said that Greece should not hold a general election after clinching an agreement on a second bailout package, suggesting instead an extension of Lucas Papademos' tenure. However, the two main unions of Greece have called for a 24hr strike on Tuesday. Looking ahead there is little in the way of major US economic data today so Greece will likely remain the dominant theme for the rest of the session.

A lot of stuff in here this morning.

Something quite notable has shifted in recent weeks in Europe, and it originates at the European paymaster - Germany. While in the past it was of utmost importance to define any Greek default as voluntary (if one even dared whisper about it), and that the money allocated to keep the Eurozone whole would be virtually limitless, this is no longer the case. In fact, reading between the headlines in the past week, it becomes increasingly obvious that Greece will very soon become a new Lehman, i.e., a case study where the leaders are overly confident they can predict the outcomes of letting a critical entity default, and manage the consequences. Alas, this only proves they have learned nothing from the Lehman case, and the aftermath is still not only unpredictable but uncontrollable. But that's a bridge that Europe will cross very shortly. And what is truly frightening is that this crossing may happen even before the next LTRO hits the banks' balance sheets, thus not affording Euro banks with sufficient capital to withstand the capital outflow and funds the unexpected. In the meantime, here is UBS summarizing the palpable change in European outlook over Greece, and over the entire "Firewall" protocol.

In contrast with better news from macro data, the negotiations about the next Greek package intensified and this will likely remain the key focus in the upcoming week. On one hand, the present value reduction in a PSI has still not been formally agreed. On the other, the Greek Government still has to commit to more reforms in order for the Troika to agree to a new program. A key deadline for this commitment is on Monday at 11am local time in Athens. Eurogroup President Juncker has talked openly about the possibility of a default on Saturday in the German weekly Der Spiegel. Beyond the ongoing focus on Greece, the week sees a relatively heavy concentration in central bank meetings, including the RBA, ECB, BOE, Poland, Indonesia and a few others. On the data side, the focus is likely on the December IP numbers due in a number of countries, including in some key Eurozone countries (Germany, Italy, France).

Yesterday we presented why when it comes to Syria, the UN Security Council can forget any attempt at "overhauling" a regime that is a cornerstone for Russian naval presence in the Mediterranean and the middle east. Today, in the aftermath of the UN reminder that it is the world's biggest collection of post-facto hypocrites, not to mention, the world's most irrelevant and ineffectual organization, anger at the Russian and Chinese veto has already manifested itself, as protesters have attacked the Russian embassy in Tripoli and tore down the Russian flag, Al Jazeera reported on Sunday. As Itar-Tass reports, "According to Al Jazeera, the riots staged by the Syria opposition involved Libyans as well. No further details are available so far. None of the Russian diplomats has been hurt in an rally stage by the Syrian opposition in front of the Russian embassy in Tripoli on Sunday, an officer from the Russian embassy told Itar-Tass over the phone. “No one has managed to break into the territory of the Russian diplomatic mission, no one of the personnel has been hurt. All are safe and sound. Although the protesters have managed to tear down the Russian flag,” the diplomat said." Still, the wily occupiers of the Kremlin preempted what they perceived as potential 'displeasure' with Russian tactics to protect its own national interests. Because as Zero Hedge has been reminding readers on occasion, Russia has something that is far more valuable to Europe than the Goldman-alum controlled printing press: it has the world's largest natural gas reserves. Which for a continent gripped in one the coldest winters on record, whose heating infrastructure is based primarily on natgas, and where Russian imports account for 25% of total nat gas, Russia has the upper hand in, well, everything. Which it gladly reminded the world of yesterday. According to the AP: Russia's state-controlled Gazprom natural gas giant acknowledged for the first time Saturday that it "had briefly reduced gas supplies to Europe amid a spell of extreme cold."  Oops... Just a fat finger there, nothing to worry about. Oh, and if anyone forgets that in the Eurasian continent it is Russia who increasingly holds all the cards, Gazprom may "briefly" cut all supplies to Europe, -40 C degree temperatures be damned. Briefly...

In one of the clearest (and most optically pleasing) discussions of recent months, David McWiliams (of Punk Economics) succinctly explains how Europe has evolved from a democracy to a bankocracy, the implications of which lead to austerity for the people and a Franco-German imposition (the 'fiscal compact') that can only lead to social unrest and chaos. In this brief (and expertly illustrated) video, the Irish economist clarifies Europe's 'dirty little secret' where economic policy is being run almost exclusively for the banks which, as we see in Greece and Ireland, means the political elite are becoming more and more detached from the people. The terror of the r-word (referendum) looms large as McWilliams analogizes the two ways out of a debt crisis (squeeze the debtor or forgive the debtor) with the catholic and protestant perspectives on sin and forgiveness. While falling short of calling for governments to go full-Keynesian (everyone knows you never go full-Keynesian), he (focusing on the problems of the current hopeful solution) summarizes the fiscal union as envisaged by France and Germany (which actually penalizes countries that are in trouble, rather than help them) as not a friendly-union but a vindictive strait-jacket put in place to help banks, not countries. It comes as no surprise to him that the price of Gold (and Bunds) is firm as the 'example' that Greece is likely to set (or face extreme social upheaval) will domino-like stumble across the other troubled nations and as he points "we have been warned". Our view remains that austerity works if countries manage to cut expenses while keeping a balance. Alas, the balance is out of skew due to 30 years of runaway full-Keynesianism, which leads indeed to the problems that McWilliams so well espouses.

Whether this is a real hack, or merely an attempt by the FBI to pursue its own ulterior motives is unclear (especially with the broad media coverage it is getting and the fact that the YouTube recording of the call is still online), but supposedly the Anonymous hacker group managed to enter and record a 16 minutes conference call between the FBI and Scotland Yard. Per AP: "Anonymous published the roughly 15-minute-long recording of the call to the Internet early Wednesday, gloating in a Twitter message that "the FBI might be curious how we're able to continuously read their internal comms for some time now." The FBI said the information "was intended for law enforcement officers only and was illegally obtained" but that no FBI systems were compromised. Scotland Yard said that they'd seen no immediate information that their operations had been compromised - but that the force was still checking. The bureau said that "a criminal investigation is under way to identify and hold accountable those responsible." It's not entirely clear how the hackers got their hands on the recording, which appears to have been edited to bleep out the names of some of the suspects being discussed. Amid the material published by Anonymous was an email purportedly sent by an FBI agent to international law enforcement agencies. It invites his foreign counterparts to join the call to "discuss the ongoing investigations related to Anonymous ... and other associated splinter groups. The email is addressed to officials in the U.K., Ireland, the Netherlands, Sweden and France, but only American and British officials can be heard on the recording." The message contained a phone number and password for accessing the call." The full recording can be heard below and a standalone mp3 can be found here.

• Greece's Hazardous Road to Restructuring (WSJ)
• Spain Coaxes Banks to Merge to Purge Losses (Bloomberg)
• Brussels Discovers New €15bn Black Hole in Greece's Finances (Guardian)
• UK Recession Predicted to Return (FT)
• Senate OKs insider trading curbs on lawmakers (Reuters)
• China Limits Mortgages for Foreigners (Bloomberg)
• Villagers scramble for fuel in Europe's big chill (Reuters)
• SNB Head Warns of Political Fallout After Crisis (FT)
• Portugal Bond Rout Overstates Greek Likeness (Bloomberg)
• Bernanke Says He Won’t Trade 2% Inflation-Rate Target for More Job Growth (Businessweek)

With the world ever more lethargic daily, as if in silent expectation of something big about to happen (quite visible in daily trading volumes), it is easy to forget that just about a year ago the Mediterranean region was rife with violent revolutions in virtually every country along the North African coast. That these have passed their acute phase does not mean that anything has been resolved. And unfortunately, as BMO's Don Coxe reminds us, it is very likely that the Mediterranean region, flanked on one side by the broke European countries of Greece, Italy, Spain (and implicitly Portugal), and on the other by the unstable powder keg of post-revolutionary Libya and Egypt, will likely become quite active yet again. Only this time, in addition to social and economic upheavals, a religious flavor may also be added to the mix. As Coxe says: "Today, the Mediterranean is two civilizations in simultaneous, rapidly unfolding crises. To date, those crises have been largely unrelated. That may well be about to change." Coxe bases part of his argument on the same Thermidorian reaction which we have warned about since early 2011, namely the power, social and economic vacuum that is unleashed in the aftermath of great social change. But there is much more to his argument, which looks much more intently at the feedback loops formed by the divergent collapsing economies that once were the cradle of civilization, and this time could eventually serve as the opposite. To wit: "The eurocrisis has been front and center for nearly two years, during which time the economic and financial fundamentals have continued to deteriorate. “The Arab Spring” came suddenly, in a series of outbursts of optimism. It may have come at the worst possible time for the beleaguered nations of the North Shore. The Mediterranean has entered one of the stormiest periods in recorded history. It is the major contributor to risk in global equity markets. It is too soon to predict how these crises will end. The Cradle of Civilization is rocking amid an array of winds and storms. “The Arab Spring” ...may have come at the worst possible time for the beleaguered nations of the North Shore."